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European Yields Rise on Data and German Debt Break Outlook

Market movers today

Key focus today will be on the German Ifo survey and US PMIs.

The Ifo survey increased in October and is expected to show a further increase in November in line with the signals from the ZEW index and other survey data pointing to a gradual bottoming from a very low level.

US PMIs have shown a bit of a diverging picture with PMI manufacturing moving slightly higher in recent months while service PMI has weakened. We look for a cooling of the economy going into the winter months which should keep service PMI under pressure. In the manufacturing sector a lift in the order-inventory ratio lately suggests we could see a further moderate rise in PMI manufacturing from the current level of 50.

The 60 second overview

Markets: it has been a fairly quiet overnight session following the Thanksgiving holiday in the US. Asian equity benchmarks and DM equity futures are trading slightly higher this morning while oil and USD FX are little changed. US yields are opening a few bp higher following the European sell-off yesterday (more below).

Sweden monetary policy. Yesterday the Riksbank kept the policy rate unchanged at 4.00% and opened up for an announcement of a further QT volume increase already at the next meeting. The policy rate path was kept roughly unchanged but pushed by one quarter, i.e. signalling a continued probability for a further hike (10bp). Read more about the Riksbank decision in our Riksbank flash comment, 23 November.

Eurozone macro data. European PMI data improved in November with the Eurozone composite measure rising from 46.5 to 47.1. However, this is still recessionary territory. Worryingly for the ECB, price indices showed higher price pressures within the services sector. This is in line with the increasing wage growth, which rose to 4.7% y/y in Q3 vs. 4.6% in Q2 according to the ECB’s negotiated wage indicator also released yesterday.

German politics. In Germany, the government has decided to pursue a suspension of the debt brake next year – as it did in 2020 – following the Constitutional Court in Karlsruhe’s rejection of the previous plan of spending EUR60bn originally intended for fighting covid-19 on climate and economic transformation. The move will be presented as part of a revised budget next week. This should be doable, as the funds will be aimed at climate expenses, which given the rain and the flooding in Germany in recent years, should be possible to push through parliament (and Karlsruhe). Holding a majority in parliament, the government could decide to keep the suspension until the next election in 2025.

Oil. The oil market took OPEC’s decision to postpone its meeting originally scheduled for Sunday by four days with relative ease. Apparently, Angola will not meet demands for reducing its quota next year. In our view, OPEC has more power to push oil prices lower than higher. The cartel’s total production led by the big voluntary cut by Saudi Arabia is already low and we doubt it will make substantial further cuts to lift oil prices. Rather there is a risk that disagreement leads to scrapping of quotas and some producers potentially leaving the cartel with everyone free to produce at will, which would be a big blow to oil prices. We think OPEC will muddle through with an extension of current production levels next year and thus do not expect the postponed meeting to be a market mover. Rather the oil market will be at the hands of global risk sentiment and the USD. We look for Brent to average USD80/bbl next year.

Japan. Overnight CPI and PMI data were released. While the PMI data revealed a further decline in the manufacturing index to 48.1 (from 48.7) the service index rose 0.1 index point to 51.7. More importantly for markets, the inflation release showed a pick-up in inflation although slightly below market expectations. That said, prints in core inflation and core-core inflation of 2.9% Y/Y and 4.0% Y/Y, respectively, remain far above Bank of Japan’s inflation target and we still expect Bank of Japan to remove its yield curve control at the coming monetary policy meetings and ultimately hike policy rates during 2024.

Equities: Global equities were higher yesterday in a dull session as US was closed for Thanksgiving celebrations. However, European stocks managed to grind led by energy and pharma industries. As mentioned before in our ‘Espresso’, one should see sessions with stability, not least on the bond side, as positive for the near-term outlook. Asian markets are mixed this morning with Japanese stocks higher on the back of solid data while Chinese markets are lower as developers give up some of their gains form yesterday. US futures a tad higher while European futures are marginally lower.

FI: European yields rose significantly yesterday following the stronger-than-expected PMI data and the German government plan to suspend the debt brake next year. 10Y Bund yields rose 7bp, while the 2s10s curve bear steepened 4bp throughout the day. Long-term inflation metrics (e.g. the 5y5y EUR inflation swap) spiked in reaction to the strong PMI data. Peripherals performed generally in line with the core. In the Netherlands, the surprising election result on Wednesday – putting far-right Geert Wilders in the lead to become PM – did not have any significant impact on spreads. US markets were closed due to the Thanksgiving holiday.

FX: In line with our expectation, the Riksbank yesterday decided to leave the repo rate unchanged at 4.00% and EUR/SEK moved higher on the hawkish “unchanged” decision. EUR/USD had a relatively quiet day due to the Thanksgiving holiday, trading around the 1.09 mark. EUR/GBP jumped lower during yesterday’s session as UK preliminary PMIs for November came in significantly higher than expected. Combined with the fiscal measures announced Wednesday in the Autumn Statement this leaves a worrying backdrop with a risk of more persistent inflation for the Bank of England.

Credit: CDS indices were broadly unchanged yesterday with iTraxx Main closing at 68bp (unchanged) and Xover 2bp tighter at 375bp. Following some busy days, the EUR primary market was nearly quiet with only one corporate deal being priced.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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